Export and International Trade Business

Export Goods: Methods of Exporting and Channels of Distribution

This article discusses Methods of Exporting and Channels of Distribution.The most common methods of export goods are indirect selling and direct selling . In indirect selling, an export intermediary normally assumes responsibility for finding overseas buyers, shipping products, and getting paid. In direct selling, the producer deals directly with a foreign buyer.

The paramount consideration in determining whether to export goods indirectly or directly is the level of resources a company is willing to devote to its international marketing effort. These are some other factors to consider when deciding whether to market indirectly or directly:

The size of the firm.

The nature of its products.

Previous export experience and expertise.

Business conditions in the selected overseas markets.

EXPORT GOODS DISTRIBUTIONS CONSIDERATIONS

Which channels of distribution should the firm use to market its products abroad?

Where should the firm produce its products and how should it distribute them in the foreign market?

What types of representatives, brokers, wholesalers, dealers, distributors, retailers, and so on should the firm use?

What are the characteristics and capabilities of the available intermediaries?

INDIRECT EXPORTING

The principal advantage of indirect marketing for a smaller company is that it provides a way to penetrate foreign markets without the complexities and risks of direct exporting. Several kinds of intermediary firms provide a range of export services. Each type of firm offers distinct advantages for the company.

Commission agents

Commission or buying agents are finders for foreign firms that want to purchase domestic products. They seek to obtain the desired items at the lowest possible price and are paid a commission by their foreign clients. In some cases, they may be foreign government agencies or quasi-governmental firms empowered to locate and purchase desired goods. Foreign government purchasing missions are one example.

Export management companies

An EMC acts as the export department for one or several producers of goods or services. It solicits and transacts business in the names of the producers it represents or in its own name for a commission, salary, or retainer plus commission. Some EMCs provide immediate payment for the producer's products by either arranging financing or directly purchasing products for resale. Typically, only larger EMCs can afford to purchase or finance exports.

EMCs usually specialize either by product or by foreign market or both. Because of their specialization, the best EMCs know their products and the markets they serve very well and usually have well-established networks of foreign distributors already in place. This immediate access to foreign markets is one of the principal reasons for using an EMC, since establishing a productive relationship with a foreign representative may be a costly and lengthy process.

One disadvantage in using an EMC is that a manufacturer may lose control over foreign sales. Most manufacturers are properly concerned that their product and company image be well maintained in foreign markets. An important way for a company to retain sufficient control in such an arrangement is to carefully select an EMC that can meet the company's needs and maintain close communication with it. For example, a company may ask for regular reports on efforts to market its products and may require approval of certain types of efforts, such as advertising programs or service arrangements. If a company wants to maintain this type of relationship with an EMC, it should negotiate points of concern before entering an agreement, since not all EMCs are willing to comply with the company's concerns.

Export trading companies

An ETC facilitates the export of domestic goods and services. Like an EMC, an ETC can either act as the export department for producers or take title to the product and export for its own account. Therefore, the terms ETC and EMC are often used interchangeably. A special kind of ETC is a group organized and operated by producers. These ETCs can be organized along multiple- or single-industry lines and can represent producers of competing products.

Export agents, merchants, or re-marketers

Export agents, merchants, or re-marketers purchase products directly from the manufacturer, packing and marking the products according to their own specifications. They then sell overseas through their contacts in their own names and assume all risks for accounts.

In transactions with export agents, merchants, or re-marketers, a firm relinquishes control over the marketing and promotion of its product, which could have an adverse effect on future sales efforts abroad. For example, the product could be under priced or incorrectly positioned in the market, or after-sales service could be neglected. On the other hand, the effort required by the manufacturer to market the product overseas is very small and may lead to sales that otherwise would take a great deal of effort to obtain.

Piggyback marketing

Piggyback marketing is an arrangement in which one manufacturer or service firm distributes a second firm's product or service. The most common piggybacking situation is when a domestic company has a contract with an overseas buyer to provide a wide range of products or services. Often, this first company does not produce all of the products it is under contract to provide, and it turns to other companies to provide the remaining products. The second company thus piggybacks its products to the international market, generally without incurring the marketing and distribution costs associated with exporting. Successful arrangements usually require that the product lines be complementary and appeal to the same customers.

DIRECT EXPORTING

The advantages of direct exporting for a company include more control over the export process, potentially higher profits, and a closer relationship to the overseas buyer and marketplace. These advantages do not come easily, however, since the company needs to devote more time, personnel, and corporate resources than are needed with indirect exporting.

When a company chooses to export directly to foreign markets, it usually makes internal organizational changes to support more complex functions. A direct exporter normally selects the markets it wishes to penetrate, chooses the best channels of distribution for each market, and then makes specific foreign business connections in order to sell its product. The rest of this chapter discusses these aspects of direct exporting in more detail.

Organizing for exporting

A company new to exporting generally treats its export sales no differently from domestic sales, using existing personnel and organizational structures. As international sales and inquiries increase, however, the company may separate the management of its exports from that of its domestic sales.

The advantages of separating international from domestic business include the centralization of specialized skills needed to deal with international markets and the benefits of a focused marketing effort that is more likely to lead to increased export sales. A possible disadvantage of such a separation is the less efficient use of corporate resources due to segmentation.

When a company separates international from domestic business, it may do so at different levels in the organization. For example, when a company first begins to export, it may create an export department with a full or part-time manager who reports to the head of domestic sales and marketing. At later stages a company may choose to increase the autonomy of the export department to the point of creating an international division that reports directly to the president.

Larger companies at advanced stages of exporting may choose to retain the international division or to organize along product or geographic lines. A company with distinct product lines may create an international department in each product division. A company with products that have common end users may organize geographically; for example, it may form a division for Europe, another for the Far East, and so on. A small company's initial needs may be satisfied by a single export manager who has responsibility for the full range of international activities. Regardless of how a company organizes for exporting, it should ensure that the organization facilitates the marketer's job. Schaefer Shelving has a variety of products and solutions for ensuring the smooth organization of distribution. Good marketing skills can help the firm overcome the handicap of operating in an unfamiliar market. Experience has shown that a company's success in foreign markets depends less on the unique attributes of its products than on its marketing methods.

Once a company has been organized to handle exporting, the proper channel of distribution needs to be selected in each market. These channels include sales representatives, agents, distributors, retailers, and end users.

Sales representatives

The representative uses the company's product literature and samples to present the product to potential buyers. A representative usually handles many complementary lines that do not compete. The sales representative usually works on a commission basis, assumes no risk or responsibility, and is under contract for a definite period of time (renewable by mutual agreement). The contract defines territory, terms of sale, method of compensation, reasons and procedures for terminating the agreement, and other details. The sales representative may operate on either an exclusive or a nonexclusive basis.

Agents

The widely misunderstood term agent means a representative who normally has authority, perhaps even power of attorney, to make commitments on behalf of the firm he or she represents. Firms in the developed countries have stopped using the term and instead rely on the term representative, since agent can imply more than intended. Any contract should state whether the representative or agent does or does not have legal authority to obligate the firm.

Distributors

The foreign distributor is a merchant who purchases merchandise from an exporter (often at substantial discount) and resells it at a profit. The foreign distributor generally provides support and service for the product, relieving the export company of these responsibilities. The distributor usually carries an inventory of products and a sufficient supply of spare parts and maintains adequate facilities and personnel for normal servicing operations. The distributor typically carries a range of noncompetitive but complementary products. End users do not usually buy from a distributor; they buy from retailers or dealers.

The payment terms and length of association between the export company and the foreign distributor are established by contract. Some export companies prefer to begin with a relatively short trial period and then extend the contract if the relationship proves satisfactory to both parties.

Foreign retailers

A company may also sell directly to a foreign retailer, although in such transactions, products are generally limited to consumer lines. The growth of major retail chains in markets such as Europe and Japan has created new opportunities for this type of direct sale. The method relies mainly on traveling sales representatives who directly contact foreign retailers, although results may be accomplished by mailing catalogs, brochures, or other literature. The direct mail approach has the benefits of eliminating commissions, reducing traveling expenses, and reaching a broader audience. For best results, however, a firm that uses direct mail to reach foreign retailers should support it with other marketing activities.

Manufacturers with ties to major domestic retailers may also be able to use them to sell abroad. Many large retailers maintain overseas buying offices and use these offices to sell abroad when practicable.

Direct sales to end users

A business may sell its products or services directly to end users in foreign countries. These buyers can be foreign governments; institutions such as hospitals, banks, and schools; or businesses. Buyers can be identified at trade shows, through international publications, or through government contact.

The company should be aware that if a product is sold in such a direct fashion, the exporter is responsible for shipping, payment collection, and product servicing unless other arrangements are made. Unless the cost of providing these services is built into the export price, a company could end up making far less than originally intended.

Locating foreign representatives and buyers

A company that chooses to use foreign representatives may meet them during overseas business trips or at domestic or international trade shows. There are other effective methods, too, that can be employed without leaving the country. Ultimately, the exporter may need to travel abroad to identify, evaluate, and sign overseas representatives; however, a company can save time by first doing homework at home. Methods include use of banks and service organizations, and publications.

Contacting and evaluating foreign representatives

Once the company has identified a number of potential representatives or distributors in the selected market, it should write directly to each. Just as the firm is seeking information on the foreign representative, the representative is interested in corporate and product information on the export firm. The prospective representative may want more information than the company normally provides to a casual buyer. Therefore, the firm should provide full information on its history, resources, personnel, the product line, previous export activity, and all other pertinent matters. The firm may wish to include a photograph or two of plant facilities and products or possibly product samples, when practical. (Whenever the danger of piracy is significant, the exporter should guard against sending product samples that could be easily copied.)

A firm should investigate potential representatives of distributors carefully before entering into an agreement. See table 4-1 below for an extensive checklist of factors to consider in such evaluations. In brief, the firm needs to know the following points about the representative or distributor's firm:

Current status and history, including background on principal officers.

Personnel and other resources (salespeople, warehouse and service facilities, etc.).

Sales territory covered.

Current sales volume.

Typical customer profiles.

Methods of introducing new products into the sales territory.

Names and addresses of firms currently represented.

Trade and bank references.

Data on whether the exporting firm's special requirements can be met.

View of the in-country market potential for the exporting firm's products. This information is not only useful in gauging how much the representative knows about the exporter's industry, it is also valuable market research in its own right.

A company may obtain much of this information from business associates who currently work with foreign representatives. However, exporters should not hesitate to ask potential representatives or distributors detailed and specific questions; exporters have the right to explore the qualifications of those who propose to represent them overseas. Well-qualified representatives will gladly answer questions that help distinguish them from less-qualified competitors.

In addition, the company may wish to obtain at least two supporting business and credit reports to ensure that the distributor or representative is reputable. By using a second credit report from another source, the firm may gain new or more complete information. Reports are available from commercial firms.

Commercial firms and banks are good sources of credit information on overseas representatives. They can provide information directly or from their correspondent banks or branches overseas. Directories of international companies may also provide credit information on foreign firms.

If the company has the necessary information, it may wish to contact a few of the foreign firm's domestic clients to obtain an evaluation of their representative's character, reliability, efficiency, and past performance. To protect itself against possible conflicts of interest, it is also important for the firm to learn about other product lines that the foreign firm represents.

Once the company has qualified some foreign representatives, it may wish to travel to the foreign country to observe the size, condition, and location of offices and warehouses. In addition, the company should meet the sales force and try to assess its strength in the marketplace. If traveling to each distributor or representative is difficult, the company may decide to meet with them at local and worldwide trade shows.

Negotiating an agreement with a foreign representative

When the company has found a prospective representative that meets its requirements, the next step is to negotiate a foreign sales agreement.

The potential representative is interested in the company's pricing structure and profit potential. Representatives are also concerned with the terms of payment, product regulation, competitors and their market shares, the amount of support provided by the exporting firm (sales aids, promotional material, advertising, etc.), training for sales and service staff, and the company's ability to deliver on schedule.

The agreement may contain provisions that the foreign representative

not have business dealings with competitive firms (this provision may cause problems in some European countries and may also cause problems under U.S. antitrust laws);

not reveal any confidential information in a way that would prove injurious, detrimental, or competitive to the exporting firm;

not enter into agreements binding to the exporting firm; and

refer all inquiries received from outside the designated sales territory to the exporting firm for action.

To ensure a conscientious sales effort from the foreign representative, the agreement should include a requirement that the foreign representative apply the utmost skill and ability to the sale of the product for the compensation named in the contract. It may be appropriate to include performance requirements such as a minimum sales volume and an expected rate of increase.

In the drafting of the agreement, special attention must be paid to safeguarding the exporter's interests in cases in which the representative proves less than satisfactory. It is vital to include an escape clause in the agreement, allowing the exporter to end the relationship safely and cleanly if the representative does not work out. Some contracts specify that either party may terminate the agreement with written notice 30, 60, or 90 days in advance. The contract may also spell out exactly what constitutes just cause for ending the agreement (e.g., failure to meet specified performance levels). Other contracts specify a certain term for the agreement (usually one year) but arrange for automatic annual renewal unless either party gives notice in writing of its intention not to renew.

In all cases, escape clauses and other provisions to safeguard the exporter may be limited by the laws of the country in which the representative is located. For this reason, the exporting firm should learn as much as it can about the legal requirements of the representative's country and obtain qualified legal counsel in preparing the contract. These are some of the legal questions to consider:

How far in advance must the representative be notified of the exporter's intention to terminate the agreement? Three months satisfy the requirements of most countries, but a verifiable means of conveyance (e.g., registered mail) may be needed to establish when the notice was served.

What is just cause for terminating a representative? Specifying causes for termination in the written contract usually strengthens the exporter's position.

Which country's laws (or which international convention) govern a contract dispute? Laws in the representative's country may forbid the representative from waiving its nation's legal jurisdiction.

What compensation is due the representative on dismissal? Depending on the length of the relationship, the added value of the market the representative has created for the exporter, and whether termination is for just cause as defined by the foreign country, the exporter may be required to compensate the representative for losses.

What must the representative give up if dismissed? The contract should specify the return of patents, trademarks, name registrations, customer records, and so on.

Should the representative be referred to as an agent? In some countries, the word agent implies power of attorney. The contract may need to specify that the representative is not a legal agent with power of attorney.

In what language should the contract be drafted? An English-language text should be the official language of the contract in most cases.

TABLE 4-1.

FACTORS TO CONSIDER WHEN CHOOSING
A FOREIGN REPRESENTATIVE OR DISTRIBUTOR

The following checklist should be tailored by each company to its own needs. Key factors vary significantly with the products and countries involved.

Size of sales force

How many field sales personnel does the representative or distributor have?

What are its short- and long-range expansion plans, if any?

Would it need to expand to accommodate your account properly? If so, would it be willing to do so?

Sales record

Has its sales growth been consistent? If not, why not? Try to determine sales volume for the past five years.

What is its sales volume per outside salesperson?

What are its sales objectives for next year? How were they determined?

Territorial analysis

What territory does it now cover?

Is it consistent with the coverage you desire? If not, is it able and willing to expand?

Does it have any branch offices in the territory to be covered?

If so, are they located where your sales prospects are greatest?

Does it have any plans to open additional offices?

Product mix

How many product lines does it represent?

Are these product lines compatible with yours?

Would there be any conflict of interest?

Does it represent any other domestic firms? If so, which ones?

If necessary, would it be willing to alter its present product mix to accommodate yours?

What would be the minimum sales volume needed to justify its handling your lines? Do its sales projections reflect this minimum figure? From what you know of the territory and the prospective representative or distributor, is its projection realistic?

Facilities and equipment

Does it have adequate warehouse facilities?

What is its method of stock control?

Does it use computers? Are they compatible with yours?

What communications facilities does it have (fax, modem, telex, etc.)?

If your product requires servicing, is it equipped and qualified to do so? If not, is it willing to acquire the needed equipment and arrange for necessary training? To what extent will you have to share the training cost?

If necessary and customary, is it willing to inventory repair parts and replacement items?

Marketing policies

How is its sales staff compensated?

Does it have special incentive or motivation programs?

Does it use product managers to coordinate sales efforts for specific product lines?

How does it monitor sales performance?

How does it train its sales staff?

Would it share expenses for sales personnel to attend factory-sponsored seminars?

Customer profile

What kinds of customers is it currently contacting?

Are its interests compatible with your product line?

Who are its key accounts?

What percentage of its total gross receipts do these key accounts represent?

Principals represented

How many principals is it currently representing?

Would you be its primary supplier?

If not, what percentage of its total business would you represent? How does this percentage compare with other suppliers?

Promotional thrust

Can it help you compile market research information to be used in making forecasts?

What media does it use, if any, to promote sales?

How much of its budget is allocated to advertising? How is it distributed among various principals?

Will you be expected to contribute funds for promotional purposes? How will the amount be determined?

If it uses direct mail, how many prospects are on its mailing list?

What type of brochure does it use to describe its company and the products that it represents?

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